(Mark One)/X/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______
Commission File Number 0-24620
DARLING INTERNATIONAL INC.(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (972) 717-0300Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock $0.01 par value per share(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $6,727,910 as of March 21, 2001 based upon the closing price of such stock as reported on the American Stock Exchange ("AMEX") on that day.
There were 15,589,077 shares of common stock, $0.01 par value, outstanding at March 21, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Selected designated portions of the Registrant's definitive Proxy Statement to be filed on or before April 30, 2001 in connection with the Registrant's 2001 Annual Meeting of stockholders are incorporated by reference into Part III of this Annual Report.
DARLING INTERNATIONAL INC. AND SUBSIDIARIESFORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
TABLE OF CONTENTS
Page No. PART I. IMPORTANT INFORMATION - GOING CONCERN RISK.............................................................. 3 ITEM 1. BUSINESS....................................................................................... 3 ITEM 2. PROPERTIES..................................................................................... 8 ITEM 3. LEGAL PROCEEDINGS.............................................................................. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................10 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................................................10 ITEM 6. SELECTED FINANCIAL DATA........................................................................11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................12 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS....................................18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................................43 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................43 ITEM 11. EXECUTIVE COMPENSATION.........................................................................43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................................................43 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................43 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................................................................................44 SIGNATURES ..............................................................................46
PART I
GOING CONCERN RISK
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the Consolidated Balance Sheet at December 30, 2000, the Company has $109.5 million of debt due under its bank credit facilities classified as a current liability because it matures in June, 2001. If the Company is unable to consummate the debt financing discussed herein, then, in the absence of another business transaction or debt agreement, the Company cannot make the principal payment due at maturity and, accordingly, the lenders could declare a default, and attempt to realize upon the collateral securing the debt, (which comprises substantially all the Company’s assets). As a result of this material uncertainty, there is doubt about the Company’s ability to continue as a going concern for a reasonable period of time. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and Note 2 of the Notes to Consolidated Financial Statements contained elsewhere herein.
Founded by the Swift meat packing interests and the Darling family in 1882, Darling International Inc. ("Darling" or the "Company") was incorporated in Delaware in 1962 under the name "Darling-Delaware Company, Inc." On December 28, 1993, the Company changed its name from "Darling-Delaware Company, Inc." to "Darling International Inc." The address of the Company's principle executive office is 251 O'Connor Ridge Boulevard, Suite 300, Irving, Texas, 75038, and its telephone number at such address is (972) 717-0300.
The Company is a recycler of food processing by-products and believes that it is the largest publicly traded processor in the United States in terms of raw material processed annually.
The Company collects and recycles animal processing by-products and used restaurant cooking oil. In addition, the Company provides grease trap collection services to restaurants. The Company processes such raw materials at 27 facilities located throughout the United States into finished products such as tallow, meat and bone meal and yellow grease. The Company sells these products nationally and internationally, primarily to producers of various industrial and commercial oleo-chemicals, soaps, pet foods and livestock feed, for use as ingredients in their products or for further processing into basic chemical compounds.
Commencing 1998, as part of an overall strategy to better commit financial resources, the Company reorganized its operations into three diverse, yet distinctive areas. These are: 1) Rendering, the core business of turning inedible waste from meat and poultry processors into high quality feed ingredients and fats for other industrial applications; 2) Restaurant Services, a group focused on growing the grease collection business while expanding the line of services, which includes grease trap servicing, offered to restaurants and food processors; and 3) Esteem Products, the business dedicated to using newly developed technologies to produce novel products from established supply sources. Due to unfavorable market conditions resulting from declining prices, in Fiscal 2000, the Esteem Product division was combined with the Company's rendering operations. Prior year segment information has been recast to conform with Fiscal 2000. In November 1998, the Company made a strategic decision to dispose of an additional segment, Bakery By-Products Recycling, a group which produces high quality bakery by-products for the feed industry. The results of the Bakery By-Products Recycling segment have been reported separately as discontinued operations. See Note 15 of Notes to Consolidated Financial Statements for further information regarding discontinued operations. For the financial results of the Company's business segments, see Note 17 of Notes to Consolidated Financial Statements.
The Company's net sales from continuing operations were $242.8 million, $258.6 million, and $337.0 million during Fiscal 2000, 1999 and 1998, respectively. In addition, net external sales by operating segment, including discontinued operations, were as follows:
Fiscal Fiscal Fiscal 2000 1999 1998 ---------------------------------------------------------------- Continuing operations: Rendering $186,445 76.8% $204,631 79.1% $275,580 73.6% Restaurant Services 56,350 23.2 53,939 20.9 61,451 16.4 Discontinued operations: Bakery By-Products Recycling - - - - 37,456 10.0 Total $242,795 100.0% $258,570 100.0% $374,487 100.0%
The Company creates finished products primarily through the drying, grinding, separating and blending of its various raw materials. The process starts with the collection of animal processing by-products (fat, bones, feathers and offal), and used restaurant cooking oil from meat packers, grocery stores, butcher shops, meat markets, poultry processors and restaurants.
The animal processing by-products are ground and heated to extract water and separate oils from animal tissue as well as to sterilize and make the material suitable as an ingredient for animal feed. Meat and bone meal is separated from the cooked material by pressing the material, then grinding and sifting it through screens. The separated tallow is centrifuged and/or refined for purity. The primary finished products derived from the processing of animal by-products are tallow and meat and bone meal. Other by-products include poultry meal, feather meal and blood meal. Used restaurant cooking oil is processed under a separate procedure that involves heating, settling and sterilizing, as well as refining, resulting in derived yellow grease, feed-grade animal fat, or oleo-chemical feedstocks.
The Company operates a fleet of approximately 800 trucks and tractor-trailers to collect raw materials from more than 80,000 restaurants, butcher shops, grocery stores, and independent meat and poultry processors. The Company replaces or upgrades its vehicle fleet to maintain efficient operations.
Raw materials are collected in one of two manners. Certain large suppliers, such as large meat processors and poultry processors are furnished with bulk trailers in which the raw material is loaded. The Company transports these trailers directly to a processing facility. The Company provides the remaining suppliers, primarily grocery stores and butcher shops with containers in which to deposit the raw material. The containers are picked up by or emptied into Company trucks on a periodic basis. The type and frequency of service is determined by individual supplier requirements, the volume of raw material generated by the supplier, supplier location, and weather, among other factors.
Used restaurant cooking oil is placed in various sizes and types of containers which are supplied by the Company. In some instances, these containers are loaded directly onto the trucks, while in other instances the oil is pumped through a vacuum hose into the truck. The Company also provides an alternative collection service to restaurants called CleanStar 2000, which is a self-contained collection system that is housed inside the restaurant, with the used cooking oil pumped directly into collection vehicles via an outside valve. The CleanStar 2000 system and service is provided either on a fee basis to the raw material customer or as a negotiated offset to the cost of raw materials purchased. Approximately 9% of the Company's restaurant suppliers utilize the CleanStar 2000 system. The frequency of all forms of collection service is determined by the volume of oil generated by the restaurant.
The raw materials collected by the Company are transported either directly to a processing plant or to a transfer station, where materials from several collection routes are loaded into trailers and transported to a processing plant. Collections of animal processing by-products generally are made during the day, and materials are delivered to plants for processing within 24 hours of collection to eliminate spoilage. Collection of used restaurant cooking oil can be made at any time of the day or night, depending on supplier preference; these materials may be held for longer periods of time before processing. The Company charges a collection fee to offset a portion of the cost incurred in collecting raw material.
During the past year, the Company's largest single supplier accounted for less than 8% of the total raw material processed by the Company, and the 10 largest raw materials suppliers accounted for approximately 31% of the total raw material processed by the Company. For a discussion of the Company's competition for raw materials, see "Competition."
The Company has two primary pricing arrangements with its raw materials suppliers. Approximately half of the Company's annual volume of raw materials is acquired on a "formula" basis. Under a formula arrangement, the charge or credit for raw materials is tied to published finished product commodity prices after deducting a fixed service charge. The Company acquires the remaining annual volume of raw material under "non-formula" arrangements whereby suppliers either are paid a fixed price, are not paid, or are charged for the collection service, depending on various economic and competitive factors.
The credit received or amount charged for raw material under both formula and non-formula arrangements is based on various factors, including the type of raw materials, the expected value of the finished product to be produced, the anticipated yields, the volume of material generated by the supplier, and processing and transportation costs. Competition among processors to procure raw materials also affects the price paid for raw materials. See "Competition."
Formula prices are generally adjusted on a weekly or monthly basis while non-formula prices or charges are adjusted as needed to respond to changes in finished product prices.
The finished products that result from the processing of animal by-products are oils (primarily tallow and yellow grease) and proteins (primarily meat and bone meal). Oils are used as ingredients in the production of pet food, animal feed and soaps. Oleo-chemical producers use these oils as feedstocks to produce specialty ingredients used in paint, rubber, paper, concrete, plastics and a variety of other consumer and industrial products. Meals are used primarily as high protein additives in pet food and animal feed.
Predominantly all of the Company's finished products are commodities which are quoted on established commodity markets or are priced relative to such commodities. While the Company's finished products are generally sold at prices prevailing at the time of sale, the Company's ability to deliver large quantities of finished products from multiple locations and to coordinate sales from a central location enables the Company to occasionally receive a premium over the then-prevailing market price.
The Company markets its finished products worldwide. Marketing activities are primarily conducted through the Company's marketing department which is headquartered in Irving, Texas. The Company also maintains sales offices in Los Angeles, California, and Newark, New Jersey for sales and distribution of selected products. This sales force is in contact with several hundred customers daily and coordinates the sale and assists in the distribution of most finished products produced at the Company's processing plants. The Company sells its finished products internationally through commodities brokers and through Company agents in various countries.
The Company sells to numerous foreign markets, including the European Economic Community, Asia, the Pacific Rim, North Africa, Mexico and South America. The Company has no material foreign operations, but exports a portion of its products to customers in various foreign counties. Total export sales were $128.7 million, $107.4 million, and $128.8 million for the years ended December 30, 2000, January 1, 2000, and January 2, 1999, respectively. The level of export sales may vary from year to year depending on the relative strength of domestic versus overseas markets. The Company obtains payment protection for most of its foreign sales by requiring payment before shipment or by requiring bank letters of credit or guarantees of payment from U.S. government agencies. The Company ordinarily is paid for its products in U.S. dollars and has not experienced any material currency translation losses or any material foreign exchange control difficulties.
The Company has not experienced any material restrictions on the export of its products, although certain countries, including India and certain Middle East countries restrict the import of proteins and fats and oils made from porcine and bovine material, and the European Community has restrictions on proteins and fats and oils made from specified bovine materials. The Bovine Spongiform Encephalopathy ("BSE") situation in Europe and new F.D.A. restrictions, coupled with much lower prices for competing commodities, caused lower prices for some of the Company's key products. See Note 17 of Notes to Consolidated Financial Statements for information regarding the Company's export sales.
Finished products produced by Darling are distributed primarily by truck and rail from the Company's plants shortly following production. While there are some temporary inventory accumulations at various port locations for export shipments, inventories rarely exceed three weeks' production and, therefore, the Company uses limited working capital to carry inventories and reduces its exposure to fluctuations in commodity prices.
Management of the Company believes that the most competitive aspect of the business is the procurement of raw materials rather than the sale of finished products. During the last ten years, pronounced consolidation within the meat packing industry has resulted in bigger and more efficient slaughtering operations, the majority of which utilize "captive" processors. Simultaneously, the number of small meat packers, which have historically been a dependable source of supply for non-captive processors, has decreased significantly. Although the total amount of slaughtering may be flat or only moderately increasing, the availability, quantity and quality of raw materials available to the independent processors from these sources have all decreased. These factors have been offset, in part, however, by increasing environmental consciousness. The need for restaurants to comply with environmental regulations concerning the proper disposal of used restaurant cooking oil is offering a growth area for this raw material source.
In marketing its finished products, the Company faces competition from other processors and from producers of other suitable commodities. Tallows and greases are in certain instances substitutes for soybean oil and palm stearine, while meat and bone meal is a substitute for soybean meal. Consequently, the prices of tallow, yellow grease, and meat and bone meal correlate with these substitute commodities. The markets for finished products are impacted mainly by the worldwide supply of fats, oils, proteins and grains. Other factors that influence the prices that the Company receives for its finished products include the quality of the Company's finished products, consumer health consciousness, worldwide credit conditions and U.S. government foreign aid. From time to time, the Company enters into arrangements with its suppliers of raw materials pursuant to which such suppliers buy back the Company's finished products.
The amount of raw materials made available to the Company by its suppliers is relatively stable on a weekly basis except for those weeks which include major holidays, during which the availability of raw materials declines because major meat and poultry processors are not operating. Weather is also a factor. Extremely warm weather adversely affects the ability of the Company to make higher quality products because the raw material deteriorates more rapidly than in cooler weather, while extremely cold weather, in certain instances, can hinder the collection of raw materials.
As of December 30, 2000, the Company employed approximately 1,242 persons full-time in continuing business segments. Approximately 42% of the total number of employees are covered by collective bargaining agreements; however, the Company has no national or multi-plant union contracts. Management believes that the Company's relations with its employees and their representatives are good. There can be no assurance, however, that new agreements will be reached without union action or will be on terms satisfactory to the Company.
The Company is subject to the rules and regulations of various federal, state and local governmental agencies. These include, but are not limited to, the FDA, which regulates food and feed production, USDA, which regulates collection and production methods, EPA, which regulates air and water discharge requirements, as well as local and state agencies governing air and water discharge. Such rules and regulations may influence the Company's operating results at one or more facilities.
The FDA rule on the feeding of mammalian protein to ruminant animals took effect in August, 1997, as a measure to prevent the potential occurrence of BSE in the United States. The Company's management believes it is in compliance with the provisions of the rule.
The Company's 27 operating facilities consist of 20 full service rendering plants, 4 yellow grease/trap grease plants, 1 blending plant, 1 edible plant, and 1 trap grease plant. Except for 4 leased facilities, all of these facilities are owned by the Company. In addition, the Company owns or leases 21 transfer stations in the United States and 1 transfer station in Canada that serve as collection points for routing raw material to the processing plants set forth below. Some locations service a single business segment while others service multiple business segments. The following is a listing of the Company's operating facilities by business segment:
LOCATION DESCRIPTION ------- ----------- Combined Rendering and Restaurant Services Business Segments ------------------------------------------------------------ Blue Earth, MN Rendering/Yellow Grease Boise, ID Rendering/Yellow Grease Collinsville, OK Rendering/Yellow Grease Dallas, TX Rendering/Yellow Grease Detroit, MI Rendering/Yellow Grease/Trap Fresno, CA Rendering/Yellow Grease Kansas City, KS Rendering/Yellow Grease Los Angeles, CA Rendering/Yellow Grease/Trap Newark, NJ Rendering/Yellow Grease Norfolk, NE Rendering/Yellow Grease San Francisco, CA Rendering/Yellow Grease/Trap Sioux City, IA Rendering/Yellow Grease St. Louis, MO Rendering/Yellow Grease Tacoma, WA Rendering/Yellow Grease/Trap Turlock, CA Rendering/Yellow Grease Rendering Business Segment -------------------------- Coldwater, MI Rendering Houston, TX Rendering Linkwood, MD Rendering Omaha, NE Rendering Omaha, NE Blending Omaha, NE Edible Oils Wahoo, NE Rendering Restaurant Services Business Segment ------------------------------------ Chicago, IL Trap Ft. Lauderdale, FL Yellow Grease/Trap Houston, TX Yellow Grease/Trap No. Las Vegas, NV Yellow Grease/Trap Tampa, FL Yellow Grease/Trap
The Company's common stock is traded on the American Stock Exchange under the symbol "DAR". The following table sets forth, for the quarters indicated, the high and low sales prices per share for the common stock as reported on the American Stock Exchange.
Fiscal Quarter Market Price ---------------------------------- High Low ----------------- ---------------- 2000: First Quarter $2.000 $1.625 Second Quarter $1.750 $1.125 Third Quarter $1.375 $0.250 Fourth Quarter $0.875 $0.250 1999: First Quarter $3.500 $1.750 Second Quarter $2.125 $1.500 Third Quarter $2.000 $1.063 Fourth Quarter $3.000 $0.875
The Company has been notified by its stock transfer agent that as of March 21, 2001, there were 87 "registered" holders of record of the common stock. There are approximately 500 beneficial stockholders of the common stock.
The Company's Credit Agreement restricts the Company's ability to pay dividends. The Company does not currently anticipate paying cash dividends on the common stock in the foreseeable future, but intends instead to retain future earnings for reinvestment in its business or reduction of its indebtedness.
The following table presents selected consolidated historical financial data for the periods indicated. The selected historical consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company for the three years ended December 30, 2000, January 1, 2000, and January 2, 1999, and the related notes thereto.
Fiscal 2000 Fiscal 1999 Fiscal 1998 Fiscal 1997 Fiscal 1996 ------------- ----------- ------------ ------------- ------------- Fifty-two Fifty-two Fifty-two Fifty-three Fifty-two Weeks Ended Weeks Ended Weeks Ended Weeks Ended Weeks Ended December 30, January 1, January 2, January 3, December 28, 2000 2000 1999 1998 1996 - --------------------------------------------- -------------- -------------- -------------- -------------- -------------- Operating Data: Net sales $242,795 $258,570 $337,031 $444,142 $467,325 ------- ------- ------- ------- ------- Cost of sales and operating expenses 190,283 210,879 283,822 362,787 375,436 Selling, general and administrative 26,736 26,773 33,073 33,247 31,512 expenses Depreciation and amortization 31,181 32,912 32,418 29,751 26,434 Provision for loss contingencies - - - - 6,075 ------- ------- ------- ------- ------- Operating income/(loss) (5,405) (11,994) (12,282) 18,357 27,868 Interest expense 13,971 15,533 12,747 13,070 12,981 Other (income)/expense, net 184 (1,812) 1,117 (1,348) (487) ------- ------- ------- ------- ------- Income/(loss) from continuing operations before income taxes (19,560) (25,715) (26,146) 6,635 15,374 Income tax expense/(benefit) - (10,015) (9,347) 2,307 7,467 ------- ------- ------- ------- ------- Earnings/(loss) from continuing operations (19,560) (15,700) (16,799) 4,328 7,907 Discontinued operations: Income/(loss) from discontinued operations, net of tax - - (637) 1,081 (233) Gain (loss) on disposal, net of tax 371 (333) (14,657) - - ------- ------- ------- ------- ------- Net income /(loss) $(19,189) $(16,033) $(32,093) $ 5,409 $ 7,674 ======= ======= ======= ======= ======= Basic earnings/(loss) per common share $ (1.23) $ (1.03) $ (2.06) $ 0.35 $ 0.50 Diluted earnings/(loss) per common share $ (1.23) $ (1.03) $ (2.06) $ 0.33 $ 0.46 Weighted average shares outstanding 15,589 15,589 15,581 15,519 15,375 Diluted weighted average shares outstanding 15,589 15,589 15,581 16,461 16,674 Other Data: EBITDA (a) $ 25,776 $ 20,918 $ 20,136 $ 48,108 $ 60,377 Depreciation 25,541 26,998 26,432 24,074 21,529 Amortization 5,640 5,914 5,986 5,677 4,905 Capital expenditures 7,684 9,851 14,967 24,520 26,449 Balance Sheet Data: Working capital (deficiency) $(106,809) $ (5,223) $ 3,070 $ 5,225 $ (5,187) Total assets 174,505 197,804 263,166 305,973 320,050 Current portion of long-term debt 109,528 7,810 7,717 5,118 15,113 Total long-term debt less current portion - 110,209 140,613 142,181 138,173 Stockholders' equity 2,724 21,913 37,946 69,756 64,033 (a) "EBITDA" represents, for any relevant period, operating profit plus depreciation and amortization, impairment of long-lived assets, and provision for loss contingencies. EBITDA is presented here not as a measure of operating results, but rather as a measure of the Company's debt service ability and is not intended to be a presentation in accordance with enerally accepted accounting principles.
The following discussion of the Company's financial condition and results of operations should be read in conjunction with the historical consolidated financial statements and notes thereto included in Item 8. Beginning in 1998, the Company was organized along operating business segments. See Note 17 of Notes to Consolidated Financial Statements.
Fifty-two Week Fiscal Year Ended December 30, 2000 ("Fiscal 2000") Compared to Fifty-two Week Fiscal Year Ended January 1, 2000 ("Fiscal 1999")
The Company recorded a loss from continuing operations of $19.6 million for Fiscal 2000 compared to a loss from continuing operations of $15.7 million for Fiscal 1999. The Company's operating loss decreased from $12.0 million for Fiscal 1999 to $5.4 million for Fiscal 2000. The improvement was primarily due to reductions in cost of sales and operating expenses, partially offset by reductions in net sales.
The Company collects and processes animal by-products (fat, bones and offal), and used restaurant cooking oil to produce finished products of tallow, meat and bone meal, and yellow grease. Sales are significantly affected by finished goods prices, quality of raw material, and volume of raw material. Net sales include the sales of produced finished goods, grease trap services, and finished goods purchased for resale, which constitute less than 12% of total sales.
During Fiscal 2000, net sales decreased by $15.8 million (6.1%) to $242.8 million as compared to $258.6 million during Fiscal 1999, primarily due to the following: 1) decreases in overall finished goods prices resulted in an $11.1 million decrease in sales during Fiscal 2000 versus Fiscal 1999. (The Company's average yellow grease prices were 12.12% lower, average tallow prices were 13.41% lower, and average meat and bone meal prices were 27.02% higher); 2) decreases in products purchased for resale resulted in an $11.9 million sales decrease; 3) decreases in the volume of raw materials processed resulted in a $9.7 million decrease in sales; and 4) other items decreased $1.2 million compared to Fiscal 1999; partially offset by 5) increases in collection fees (to offset a portion of the cost incurred in collecting raw material) of $13.0 million; 6) improved yields in production of $4.1 million; and 7) increases in finished hides sales which accounted for $1.0 million.
Cost of sales and operating expenses includes prices paid to raw material suppliers, the cost of product purchased for resale, and the cost to collect and process the raw material. The Company utilizes both fixed and formula pricing methods for the purchase of raw materials. Fixed prices are adjusted where possible as needed for changes in competition and significant changes in finished goods market conditions, while raw materials purchased under formula prices are correlated with specific finished goods prices.
During Fiscal 2000, cost of sales and operating expenses decreased $20.6 million (9.8%) to $190.3 million as compared to $210.9 million during Fiscal 1999, primarily as a result of the following: 1) lower raw material prices paid, correlating to decreased prices for fats and oils and meat and bone meal, resulted in decreases of $6.4 million in cost of sales; 2) decreases in products purchased for resale resulted in a $11.9 million decrease; 3) decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $1.8 million in cost of sales; 4) reductions in repairs expense, payroll, and contract hauling operating expenses of $4.8 million; and 5) other changes resulted in a decrease of $2.7 million; partially offset by 6) increases in natural gas, sewer expense and utilities, resulted in an increase of $6.7 million; and 7) increases in hides purchases of $0.3 million.
Selling, general and administrative expenses were $26.7 million during Fiscal 2000, a $0.1 million decrease from $26.8 million during Fiscal 1999. Decreases in professional and legal fees were partially offset by various expense increases.
Depreciation and amortization charges decreased $1.7 million, to $31.2 million during Fiscal 2000 as compared to $32.9 million during Fiscal 1999. Included in Fiscal 2000 and Fiscal 1999 depreciation and amortization expense are impairment charges of $4.0 million and $1.4 million, respectively, due to impairment recorded in accordance with Statement of Financial Accounting Standards No. 121.
Interest expense was $14.0 million during Fiscal 2000, compared to $15.5 million during Fiscal 1999, a decrease of $1.5 million. Lower debt during Fiscal 2000 was partially offset by higher interest rates.
The Company recorded a valuation allowance to eliminate the deferred tax benefit attributable to the Fiscal 2000 loss. This results in a decrease in income tax benefit of $10.0 million, compared to Fiscal 1999. In Fiscal 1999, the Company recorded a $10.0 million income tax benefit, which consisted of $9.2 million of federal tax benefit and $0.8 million for various state and foreign tax benefits.
The Company made capital expenditures of $7.7 million during Fiscal 2000 as compared to $9.9 million in Fiscal 1999.
The operations of the Bakery By-Products Recycling segment have been classified as discontinued operations. In Fiscal 2000, the Company realized a gain related to a reduction in an indemnification reserve, net of tax, of $0.4 million related to the sale of this business segment which was finalized on April 5, 1999, compared to a loss of $0.3 million in Fiscal 1999.
Fifty-two Week Fiscal Year Ended January 1, 2000, ("Fiscal 1999") Compared to Fifty-two Week Fiscal Year Ended January 2, 1999 ("Fiscal 1998")
The Company recorded a loss from continuing operations of $15.7 million for Fiscal 1999 compared to a loss from continuing operations of $16.8 million for Fiscal 1998. The Company's operating loss decreased from $12.3 million for Fiscal 1998 to $12.0 million for Fiscal 1999. The improvement was primarily due to reductions in selling, general and administrative costs and operating expenses. Interest expense increased from $12.7 million in Fiscal 1998 to $15.5 million in Fiscal 1999, primarily due to higher overall interest rates.
In 1998, the Company made a strategic decision to discontinue the operations of the Bakery By-Products Recycling segment in order to concentrate its financial and human resources on its other business segments. The sale was finalized on April 5, 1999. During Fiscal 1998, the Company recorded an estimated loss on the disposal of the discontinued segment, net of tax, of $14.7 million. The results of the Bakery By-Products Recycling segment have been reported separately as discontinued operations for each year presented.
During Fiscal 1999, net sales decreased by $78.4 million (23.3%) to $258.6 million as compared to $337.0 million during Fiscal 1998, primarily due to the following: 1) decreases in overall finished goods prices resulted in an $46.3 million decrease in sales during Fiscal 1999 versus Fiscal 1998. (The Company's average yellow grease prices were 18.96% lower, average tallow prices were 21.94% lower, and average meat and bone meal prices were 15.69% lower); 2) decreases in the volume of raw materials processed resulted in a $25.0 million decrease in sales; 3) decreases in finished hides sales accounted for $4.4 million in sales decreases; 4) decreases in products purchased for resale resulted in a $10.5 million sales decrease, partially offset by 5) increases in collection fees (to offset a portion of the cost incurred in collecting raw material) of $7.2 million and inventory changes of $0.6 million somewhat offset the decreases.
During Fiscal 1999, cost of sales and operating expenses decreased $72.9 million (25.7%) to $210.9 million as compared to $283.8 million during Fiscal 1998, primarily as a result of the following: 1) lower raw material prices paid, correlating to decreased prices for fats and oils and meat and bone meal, resulted in decreases of $43.0 million in cost of sales; 2) decreases in the volume of raw materials collected and processed resulted in a decrease of approximately $5.1 million in cost of sales and operating expenses; 3) decreases in products purchased for resale resulted in a $10.0 million decrease; 4) decreases in hides purchases accounted for $4.0 million in cost of sales decrease; 5) decreases in operating expenses, primarily labor, repairs, natural gas and contract hauling costs, resulted in a decrease of $11.6 million; and 6) inventory and other changes resulted in an increase of $0.8 million.
Selling, general and administrative expenses were $26.8 million during Fiscal 1999, a $6.3 million decrease from $33.1 million during Fiscal 1998. Decreases were realized in labor costs, travel and entertainment, and professional and legal fees.
Depreciation and amortization charges increased $0.5 million, to $32.9 million during Fiscal 1999 as compared to $32.4 million during Fiscal 1998, primarily due to impairment charges of $1.4 million in Fiscal 1999, recorded in accordance with Statement of Financial Accounting Standards No. 121.
Interest expense increased $2.8 million, to $15.5 million during Fiscal 1999 as compared to $12.7 million during Fiscal 1998, primarily due to increases in the overall interest rate partially offset by a $30.3 million reduction in principal.
The income tax benefit of $10.0 million for Fiscal 1999 consists of $9.2 million of federal tax benefit and $0.8 million for various state and foreign tax benefits. In Fiscal 1998, the Company recorded a $9.3 million income tax benefit which consisted of $8.5 million of federal tax benefit and $0.8 million for various state and foreign tax benefits.
The Company made capital expenditures of $9.9 million during Fiscal 1999 as compared to $15.0 million in Fiscal 1998.
The operations of the Bakery By-Products Recycling segment have been classified as discontinued operations. The Company realized an additional loss on disposal, net of tax, of $0.3 million on the sale of this business segment which was finalized on April 5, 1999, in addition to the amount estimated in Fiscal 1998.
At December 30, 2000, the Company’s borrowings under the Amended and Restated Credit Agreement were classified as a current liability. As of December 30, 2000, the Company was in compliance with all provisions of this agreement, and the Company has been in compliance with all provisions of this agreement, and has made all interest and principal payments as they have come due since the Amended and Restated Credit Agreement’s inception on January 22, 1999.
The Company’s management has been in discussions with the Company’s lenders regarding obtaining either new financing or extending the existing Amended and Restated Credit Agreement, but no agreement has been consummated. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments related to recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. If the Company is not successful in obtaining new financing or extending the existing Amended and Restated Credit Agreement, the lenders could declare a default and attempt to realize upon the collateral securing the debt, (which comprises substantially all the Company’s assets). The absence of a new financing agreement or extension of the existing Amended and Restated Credit Agreement, creates a material uncertainty regarding the ability of the Company to continue as a going concern. Management is not able to predict what the outcome or consequences of these matters might be.
Effective June 5, 1997, the Company entered into a Credit Agreement (the "Credit Agreement") which originally provided for borrowings in the form of a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. On October 3, 1998, the Company entered into an amendment of the Credit Agreement whereby BankBoston, N.A., as agent, and the other participant banks in the Credit Agreement (the "Banks") agreed to forbear from exercising rights and remedies arising as a result of several existing events of default of certain financial covenants (the "Defaults") under the Credit Agreement, as amended, until November 9, 1998.
On November 6, 1998, the Company entered into an extension of the amended Credit Agreement whereby the Banks agreed to forbear from exercising rights and remedies arising as a result of the Defaults until December 14, 1998. The forbearance period was subsequently extended to January 22, 1999. On January 22, 1999, the Company and the banks entered into an Amended and Restated Credit Agreement (the "Amended and Restated Credit Agreement").
The Amended and Restated Credit Agreement provides for borrowing in the form of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility. As of December 30, 2000, the Term Loan was paid in full.
The Revolving Credit Facility provides for borrowings up to a maximum of $135,000,000 with sublimits available for letters of credit and a swingline. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility bears interest, payable quarterly, at a Base Rate (8.50% at December 30, 2000) plus a margin of 1%. Additionally, the Company must pay a commitment fee equal to 0.375% per annum on the unused portion of the Revolving Credit Facility. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility provides for a mandatory reduction of $2,500,000 on March 31, 2001, with the remaining balance due at maturity on June 30, 2001. As of December 30, 2000, $109,498,000 was outstanding under the Revolving Credit Facility, and the Company had outstanding irrevocable letters of credit aggregating $11,098,300.
Substantially all assets of the Company are either pledged or mortgaged as collateral for borrowings under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement contains certain terms and covenants, which, among other matters, restrict the incurrence of additional indebtedness, the payment of cash dividends, the retention of certain proceeds from sales of assets, and the annual amount of capital expenditures, and requires the maintenance of certain minimum financial ratios. As of December 30, 2000, no cash dividends could be paid to the Company's stockholders pursuant to the Amended and Restated Credit Agreement.
The Company has interest rate swap agreements which are used to reduce the potential impact of increases in interest rates on floating-rate long-term debt. At December 30, 2000, the Company was party to three interest rate swap agreements. Under the terms of the swap agreements, the interest obligation on $70 million of Amended and Restated Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly. One swap agreement for $25 million matures June 27, 2002, bears interest at 6.5925% and the Company's receive rate is based on the three-month LIBOR. A second swap agreement for $25 million matures June 27, 2001, bears interest at 9.83% and the Company's receive rate is based on the Base Rate. The third swap agreement for $20 million matures on June 27, 2002, with a one-time option for the bank to cancel at June 27, 2001, bears interest at 9.17% and the Company's receive rate is based on the Base Rate. The Company has recorded a liability of $495,000 at December 30, 2000, for the fair value of the portion of the two swap agreements described above which extend beyond June, 2001, the expiration date of the Company's Revolving Credit Facility, because they do not qualify for hedge accounting.
On December 30, 2000, the Company had a working capital deficit of $106.8 million and its working capital ratio was 0.30 to 1 compared to a working capital deficit of $5.2 million and a working capital ratio of 0.88 to 1 on January 1, 2000.
ACCOUNTING MATTERS
The Company will adopt Financial Accounting Standard No. 133 on December 31, 2000 (the first day of Fiscal 2001). Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133), was issued by the Financial Accounting Standards Board in June, 1998. Statement 133, as amended by Statement 137, standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss are reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.
Upon adoption, the provisions of Statement 133 must be applied prospectively. Adoption of Statement 133 will result in the Company recording a net transition gain of $2,220,000 in other comprehensive income at December 31, 2000. At December 30, 2000, the Company has recorded a receivable from broker and deferred income of $2,599,000 related to the fair value of its natural gas fixed for float swap contracts in a gain position which qualify for hedge accounting treatment and a liability of $495,000 for the fair value of interest rate swap contracts in a loss position which do not qualify for hedge accounting treatment. Upon adoption of Statement 133, the Company will report a derivative asset of $2,599,000 related to the natural gas swaps and a derivative liability of $874,000 related to the interest rate swaps.
The Company expects that the adoption of Statement 133 will increase the volatility of reported earnings and other comprehensive income. In general, the amount of volatility will vary with the level of derivative activities during any period.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in the Annual Report on Form 10-K, including, without limitation, the statements under the sections entitled "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings" and located elsewhere herein regarding industry prospects and the Company's financial position are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. In addition to those factors discussed elsewhere in this report, important factors that could cause actual results to differ materially from the Company's expectations include: the Company's ability to refinance its Amended and Restated Credit Agreement which expires June 30, 2001, the Company's continued ability to obtain sources of supply for its rendering operations; general economic conditions in the European and Asian markets; and prices in the competing commodity markets which are volatile and are beyond the Company's control. Among other things, future profitability may be affected by the Company's ability to grow its business which faces competition from companies which may have substantially greater resources than the Company.
The principal market risks affecting the Company are exposures to changes in interest rates on debt and the price of natural gas used in the Company's plants. The Company uses interest rate and natural gas swaps to manage these risks. While the Company does have international operations, and operates in international markets, it considers its market risks in such activities to be immaterial.
The Company uses interest rate swaps to hedge adverse interest rate changes on a portion of its long-term debt. At December 30, 2000, the Company was party to three interest rate swap agreements. Under the terms of the swap agreements, the interest obligation on $70 million of Amended and Restated Credit Agreement floating-rate debt was exchanged for fixed rate contracts which bear interest, payable quarterly. One swap agreement for $25 million matures June 27, 2002, bears interest at 6.5925% and the Company's receive rate is based on the three-month LIBOR. A second swap agreement for $25 million matures June 27, 2001, bears interest at 9.83% and the Company's receive rate is based on the Base Rate. The third swap agreement for $20 million matures on June 27, 2002, with a one-time option for the bank to cancel at June 27, 2001, bears interest at 9.17% and the Company's receive rate is based on the Base Rate. Assuming variable rates at the end of each fiscal year and average long-term borrowings for each fiscal year, a one-hundred basis point change in interest rate would impact net interest expense by $0.7 million and $0.2 million, net of the effect of swaps, for Fiscal 2000 and Fiscal 1999, respectively.
The Company is party to natural gas fixed for float swap agreements traded on the NYMEX to manage price risk of natural gas used in its facilities. Realized gains or losses from the settlement of these financial hedging instruments are recognized as an adjustment of the cost of purchased natural gas in the month of delivery. The gains and losses realized as a result of these hedging activities are substantially offset in the cash market when the hedged natural gas is delivered to the facilities.
As of December 30, 2000, the Company has fixed for float swaps in place representing 300,000 mmbtu of natural gas purchases per month for January, February and March, 2001 with a purchase price of $4.682/mmbtu. The total fair value of these positions at December 30, 2000 was a gain of $2,599,200 which was deferred and which will be recognized as the hedged natural gas is delivered to the facilities in January, February and March, 2001.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages ----- Independent Auditors' Report 20 Consolidated Balance Sheets- December 30, 2000 and January 1, 2000 21 Consolidated Statements of Operations- Three years ended December 30, 2000 22 Consolidated Statements of Stockholders' Equity - Three years ended December 30, 2000 23 Consolidated Statements of Cash Flows - Three years ended December 30, 2000 24 Notes to Consolidated Financial Statements - December 30, 2000 and January 1, 2000 25 Financial Statement Schedule: II - Valuation and Qualifying Accounts 42 Three years ended December 30, 2000
______________________________
The Board of Directors and ShareholdersDarling International Inc.:
We have audited the consolidated financial statements of Darling International Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Darling International Inc. and subsidiaries as of December 30, 2000 and January 1, 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement schedule have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has debt of $109,498,000, classified as a current liability at December 30, 2000 because it matures in June 2001. The Company has not as yet obtained new financing or extended the maturity date. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 2. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.
Dallas, TexasMarch 2, 2001
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance SheetsDecember 30, 2000 and January 1, 2000(in thousands, except share and per share data)
December 30, January 1, ASSETS (notes 2 and 9) 2000 2000 - --------------------- ------------ ---------- Current assets: Cash and cash equivalents $ 3,509 $ 1,828 Accounts receivable 21,837 16,987 Inventories (note 3) 8,300 9,644 Prepaid expenses 3,046 3,948 Deferred income taxes (note 11) 3,081 4,203 Assets held for sale (note 5) 3,161 - Other (note 1) 2,923 518 ------- ------- Total current assets 45,857 37,128 Property, plant and equipment, net (note 4) 88,242 113,824 Collection routes and contracts, less accumulated amortization of $18,828 at December 30, 2000 and $15,819 at January 1, 2000 32,140 36,965 Goodwill, less accumulated amortization of $883 at December 30, 2000 and $741 at January 1, 2000 4,632 4,813 Other assets (note 6) 3,634 5,074 ------- ------- $174,505 $197,804 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current portion of long-term debt (note 9) $109,528 $ 7,810 Accounts payable, principally trade 14,341 11,139 Accrued expenses (note 7) 23,160 23,292 Accrued interest 3,038 110 Deferred income (note 1) 2,599 - ------- ------- Total current liabilities 152,666 42,351 Long-term debt, less current portion (note 9) - 110,209 Other noncurrent liabilities (note 10) 16,247 19,341 Deferred income taxes (note 11) 2,868 3,990 ------- ------- Total liabilities 171,781 175,891 ------- ------- Stockholders' equity (notes 9, 11 and 12): Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued - - Common stock, $.01 par value; 25,000,000 shares authorized, 15,589,077 shares issued and outstanding at December 30, 2000 and January 1, 2000 156 156 Additional paid-in capital 35,063 35,063 Accumulated deficit (32,495) (13,306) ------- ------- Total stockholders' equity 2,724 21,913 ------- ------- Commitments and contingencies (notes 8 and 16) $174,505 $197,804 ======= ------- The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of OperationsThree years ended December 30, 2000(in thousands, except share and per share data)
December January January 30, 2000 1, 2000 2, 1999 ------------- -------------- --------------- Net sales $242,795 $258,570 $337,031 ------- ------- ------- Costs and expenses: Cost of sales and operating expenses 190,283 210,879 283,822 Selling, general and administrative expenses 26,736 26,773 33,073 Depreciation and amortization 31,181 32,912 32,418 ------- ------- ------- Total costs and expenses 248,200 270,564 349,313 ------- ------- ------- Operating loss (5,405) (11,994) (12,282) ------- ------- ------- Other income/(expense): Interest expense (13,971) (15,533) (12,747) Other, net (184) 1,812 (1,117) ------- ------- ------- Total other income(expense) (14,155) (13,721) (13,864) ------- ------- ------- Loss from continuing operations before income taxes (19,560) (25,715) (26,146) Income tax benefit (note 11) - (10,015) (9,347) ------- ------- ------- Loss from continuing operations (19,560) (15,700) (16,799) Discontinued operations (note 15): Income/(loss) from discontinued operations, net of tax - - (637) Gain/(loss) on disposal of discontinued operations, net of tax 371 (333) (14,657) ------- ------- ------- Net loss $(19,189) $(16,033) $(32,093) ======= ======= ======= Basic earnings (loss) per share: Continuing operations $ (1.25) $ (1.01) $ (1.08) Discontinued operations: Income/(loss) from operations - - (0.04) Gain/(loss) on disposal 0.02 (0.02) (0.94) ------- ------- ------- Total $ (1.23) $ (1.03) $ (2.06) ======= ======= ======= Diluted earnings (loss) per share: Continuing operations $ (1.25) $ (1.01) $ (1.08) Discontinued operations: Income/(loss) from operations - - (0.04) Gain/(loss) on disposal 0.02 (0.02) (0.94) ------- ------- ------- Total $ (1.23) $ (1.03) $ (2.06) ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Stockholders’ EquityThree years ended December 30, 2000(in thousands, except share and per share data)
Common stock ---------------------- Retained Additional earnings/ Total Number $.01 par paid-in (accumulated stockholders' of shares value capital deficit) equity - ------------------------------------------------------------------------------------------------------------- Balances at January 3, 1998 15,563,037 $ 156 $ 34,780 $ 34,820 $ 69,756 Issuance of common stock 26,040 - 98 - 98 Tax benefits relating to January 1, 1994 valuation allowance - - 185 - 185 Net loss - - - (32,093) (32,093) ---------- ----- ------- ------- ------- Balances at January 2, 1999 15,589,077 156 35,063 2,727 37,946 Net loss - - - (16,033) (16,033) ---------- ----- ------- ------- ------- Balances at January 1, 2000 15,589,077 156 35,063 (13,306) 21,913 Net loss - - - (19,189) (19,189) ---------- ----- ------- ------- ------- Balances at December 30, 2000 15,589,077 $ 156 $ 35,063 $(32,495) $ 2,724 ========== ==== ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash FlowsThree years ended December 30, 2000(in thousands)
December 30, January 1, January 2, 2000 2000 1999 -------------- ------------- ------------ Cash flows from operating activities: Loss from continuing operations $ (19,560) $ (15,700) $ (16,799) Adjustments to reconcile loss from continuing operations to net cash provided by continuing operating activities: Depreciation and amortization 31,181 32,912 32,418 Deferred income tax benefit - (9,911) (9,312) Loss/(gain) on sale of assets 144 (2,060) 982 Changes in operating assets and liabilities: Accounts receivable (4,850) (372) 12,627 Inventories and prepaid expenses 2,246 2,092 749 Accounts payable and accrued expenses 3,070 (4,328) 265 Accrued interest 2,928 (546) (256) Other 1,084 (1,403) 3,403 -------- -------- -------- Net cash provided by continuing operations 16,243 684 24,077 Net cash provided by discontinued operations - 119 1,388 -------- -------- -------- Net cash provided by operating activities 16,243 803 25,465 -------- -------- -------- Cash flows from investing activities: Recurring capital expenditures (7,684) (9,851) (14,967) Gross proceeds from sale of property, plant and equipment, assets held for disposition and other assets 4,412 32,150 4,090 Payments related to routes and other intangibles (636) (152) (341) Net cash used in discontinued operations - (330) (1,999) -------- -------- -------- Net cash provided by/(used in) investing activities (3,908) 21,817 (13,217) -------- -------- -------- Cash flows from financing activities: Proceeds from long-term debt 171,351 179,927 99,980 Payments on long-term debt (179,842) (210,237) (99,084) Contract payments (2,163) (2,377) (3,326) Deferred loan costs - (300) (118) Issuance of common stock - - 99 Net cash used in discontinued operations - (150) (460) -------- -------- -------- Net cash used in financing activities (10,654) (33,137) (2,909) -------- -------- -------- Net change in cash and cash equivalents from discontinued operations - 28 29 -------- -------- -------- Net increase/(decrease) in cash and cash equivalents 1,681 (10,489) 9,368 Cash and cash equivalents at beginning of year 1,828 12,317 2,949 -------- -------- -------- Cash and cash equivalents at end of year $ 3,509 $ 1,828 $ 12,317 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 9,161 $ 14,550 $ 11,997 -------- -------- -------- Income taxes, net of refunds $ (1,777) $ (625) $ (1,454) -------- -------- -------- The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial StatementsDecember 30, 2000 and January 1, 2000
December 30, January 1, 2000 2000 ------------- ------------ Finished product $ 7,117 $ 8,897 Supplies and other 1,183 747 ------- ------- $ 8,300 $ 9,644 ======= =======
December 30, January 1, 2000 2000 ------------- ---------- Land $ 9,871 $ 11,291 Buildings and improvements 27,272 28,003 Machinery and equipment 139,678 139,569 Vehicles 48,041 51,439 Construction in process 4,324 6,234 -------- -------- 229,186 236,536 Accumulated depreciation 140,944 122,712 -------- -------- $ 88,242 $ 113,824 ======== ========
December 30, 2000 -------------- Esteem $ 1,400 Peptide 862 Milwaukee, WI 527 Billings, MT 372 ------- $ 3,161 =======
December 30, January 1, 2000 2000 -------------- ------------ Prepaid pension cost (note 13) $ 2,054 $ 2,092 Deposits and other 1,580 2,982 ------- ------- $ 3,634 $ 5,074 ======= =======
December 30, January 1, 2000 2000 ------------- ----------- Insurance $ 6,004 $ 3,339 Compensation and benefits 4,093 4,480 Utilities and sewage 3,981 2,649 Reserve for environmental and litigation matters (note 16) 1,149 2,000 Other 7,933 10,824 ------- ------- $ 23,160 $ 23,292 ======= =======
Period Ending Fiscal Operating Leases --------------------- ------------------ 2001 $ 3,484 2002 3,241 2003 2,432 2004 1,870 2005 1,257 Thereafter 8,400 ------- Total $ 20,684 =======
December 30, January 1, 2000 2000 ------------- ----------- Credit Agreement: Revolving Credit Facility $109,498 $ 110,179 Term Loan - 7,720 Other notes 30 120 ------- -------- 109,528 118,019 Less current maturities 109,528 7,810 ------- -------- $ - $ 110,209 ======== ========
December 30, January 1, 2000 2000 ------------ ----------- Reserve for insurance, environmental, litigation and tax matters (note 16) $13,214 $14,927 Liabilities associated with consulting and noncompete agreements 2,868 4,253 Other 165 161 ------ ------ $16,247 $19,341 ====== ======
December 30, January 1, January 2, 2000 2000 1999 ------------- ----------- ----------- Current: Federal $ - $ - $ (34) State - - - Foreign - - - Deferred: Federal - (9,183) (8,432) State - (796) (784) Foreign - (36) (97) ----- ------- ------ $ - $(10,015) $(9,347) ===== ======= ======
December 30, January 1, January 2, 2000 2000 1999 ------------------------------------------------ Computed "expected" tax expense $ (6,846) $ (9,000) $(9,151) State income taxes, net of federal benefit - (517) (510) Tax-exempt income of foreign sales corporation - - 116 Change in valuation allowance 7,554 (311) - Other, net (708) (187) 198 ------- ------- ------ $ - $(10,015) $(9,347) ======= ======= ======
December 30, January 1, 2000 2000 --------------------------------- Deferred tax assets: Net operating loss carryforwards $ 35,668 $ 31,516 Capital loss carryforwards - 760 Loss contingency reserves 5,457 5,722 Other 1,314 2,785 -------- -------- Total gross deferred tax assets 42,439 40,783 Less valuation allowance (21,705) (14,151) -------- -------- Net deferred tax assets 20,734 26,632 ======== ======== Deferred tax liabilities: Collection routes and contracts (6,926) (7,955) Property, plant and equipment (13,023) (17,635) Other (572) (829) -------- -------- Total gross deferred tax liabilities (20,521) (26,419) -------- -------- $ 213 $ 213 ======== ========
2000 1999 1998 ------------------------------------------------- Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 5.28% 6.38% 5.25% Expected life 10 years 10 years 10 years Expected annual volatility 42.31-98.64% 62.41 - 66.59% 59.95-64.12%
2000 1999 1998 ----------------------------------- Net loss As reported $(19,189) $(16,033) $(32,093) Pro forma $(20,415) $(16,534) $(33,821) Basic loss per common share As reported $(1.23) $(1.03) $(2.06) Pro forma $(1.31) $(1.06) $(2.17) A summary of transactions for all stock options granted follows: Option exercise Weighted-avg. Number of price exercise price shares per share per share ----------------------------------------------------- Options outstanding at January 3, 1998 3,050,992 $2.86-10.88 $6.02 Granted 96,900 3.44-8.69 7.41 Canceled (43,530) 4.13-10.29 8.34 Exercised (26,040) 3.45-4.13 3.81 --------- Options outstanding at January 2, 1999 3,078,322 2.86-10.88 6.05 Granted 111,000 1.75-2.63 2.12 Canceled (952,687) 2.63-10.29 6.43 --------- Options outstanding at January 1, 2000 2,236,635 1.75-10.88 5.69 ========= Granted 1,129,050 0.50-1.75 1.11 Canceled (1,031,305) 2.625-10.875 7.74 --------- Options outstanding at December 30, 2000 2,334,380 $0.50-9.50 $2.43 ========= Options exercisable at December 30, 2000 2,253,590 $0.50-9.50 $2.43 =========
December 30, January 1, 2000 2000 ------------- ----------- Change in benefit obligation: Benefit obligation at beginning of year $45,991 $47,106 Service cost 1,478 1,781 Interest cost 3,363 3,110 Amendments 264 Actuarial (gain)/loss (2,973) (4,123) Benefits paid (2,455) (2,148) ------ ------ Benefit obligation at end of year 45,404 45,990 ------ ------ Change in plan assets: Fair value of plan assets at beginning of year 46,683 42,874 Actual return on plan assets 4,052 5,566 Employer contribution 601 391 Benefits paid (2,455) (2,148) ------ ------ Fair value of plan assets at end of year 48,881 46,683 ------ ------ Funded status 3,477 693 Unrecognized actuarial (gain)/loss (2,148) 575 Unrecognized prior service cost 725 824 ------ ------ Prepaid benefit cost $ 2,054 $ 2,092 ====== ====== Net pension cost includes the following components (in thousands): December 30, January 1, January 2, 2000 2000 1999 ------------------------------------------ Service cost $1,478 $1,781 $1,360 Interest cost 3,363 3,110 2,835 Expected return on plan assets (4,217) (3,894) (3,870) Net amortization and deferral 98 73 70 ----- ----- ----- Net pension cost $ 722 $1,070 $ 395 ===== ===== ===== Assumptions used in accounting for the employee benefit pension plans were: December 30, January 1, January 2, 2000 2000 1999 ---------------------------------------- Weighted average discount rate 7.75% 7.50% 6.75% Rate of increase in future compensation levels 5.08% 5.17% 5.80% Expected long-term rate of return on assets 9.25% 9.25% 9.25%
January 2, 1999 ------------- Net sales $37,456 Cost and expenses 38,484 Income (loss) before income taxes (1,028) Provision for income taxes (391) ------ Net earnings (loss) $ (637) ======
Business Segment Net Revenues (in thousands): ----------------------------- December 30, January 1, 2000 January 2, 2000 1999 --------------------------------------------------- Rendering: Trade $186,445 $204,631 $275,580 Intersegment 26,011 27,970 29,316 ------- ------- ------- 212,456 232,601 304,896 ------- ------- ------- Restaurant Services: Trade 56,350 53,939 61,451 Intersegment 7,781 7,204 7,521 ------- ------- ------- 64,131 61,143 68,972 ------- ------- ------- Eliminations (33,792) (35,174) (36,837) ------- ------- ------- Total $242,795 $258,570 $337,031 ======= ======= ======= Business Segment Profit (Loss) (in thousands): ------------------------------ December 30, January 1, January 2, 2000 2000 1999 ----------------------------------------------- Rendering $ 8,170 $ 3,249 $ 2,439 Restaurant Services 3,487 922 773 Corporate Activities (17,246) (15,882) (16,892) Interest expense (13,971) (14,004) (12,466) ------- ------- ------- Loss from continuing operations before income taxes $(19,560) $(25,715) $(26,146) ======= ======= =======
Business Segment Assets (in thousands): ----------------------- December 30, January 1, 2000 2000 ----------------------------------- Rendering $ 64,199 $ 79,376 Restaurant Services 17,290 24,753 Combined Rend./Rest. Svcs. 72,722 77,956 Corporate Activities 20,294 15,719 ------- ------- Total $174,505 $197,804 ======= ======= Business Segment Property, Plant and Equipment (in thousands): ---------------------------------------------- December 30, January 1, 2000 2000 ----------------------------------- Depreciation and amortization: Rendering $21,531 $22,277 Restaurant Services 6,323 7,449 Corporate Activities 3,327 3,186 ------- ------- Total $31,181 $32,912 ======= ======= Additions: Rendering $ 2,168 $ 3,741 Restaurant Services 2,897 4,279 Combined Rend./Rest. Svcs. 2,159 1,661 Corporate Activities 460 170 ------- ------- Total $ 7,684 $ 9,851 ======= ======= The Company has no material foreign operations, but exports a portion of its products to customers in various foreign countries. Geographic Area Net Trade Revenues (in thousands): ---------------------------------- December 30, January 1, January 2, 2000 2000 1999 --------------------------------------------- United States $114,102 $151,165 $208,255 Korea 6,041 13,029 5,897 Spain 963 1,798 8,237 Mexico 25,090 19,320 9,094 Japan 1,916 2,162 5,037 N. Europe 707 2,095 694 Pacific Rim 889 9,008 6,592 Taiwan 1,775 2,415 3,342 Canada 864 580 1,659 Latin/South America 13,408 13,413 10,772 Other/Brokered 77,040 43,585 77,452 ------- ------- ------- Total $242,795 $258,570 $337,031 ======= ======= ======= Other/Brokered trade revenues represent product for which the ultimate destination is not monitored.
Year Ended December 30, 2000 ------------------------------------------------------------------ First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Net sales $62,818 $61,557 $57,629 $60,791 Operating income (loss) 194 (1,200) (1,550) (2,849) Loss from continuing operations (3,026) (4,766) (5,169) (6,599) Discontinued operations - Gain on disposal - 121 - 250 Net earnings (loss) (3,026) (4,645) (5,169) (6,349) Basic earnings (loss) per share (0.19) (0.30) (0.33) (0.41) Diluted earnings (loss) per share (0.19) (0.30) (0.33) (0.41) Year Ended January 1, 2000 ------------------------------------------------------------------ First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Net sales $69,846 $58,182 $63,381 $67,161 Operating loss (2,625) (2,818) (3,318) (3,233) Loss from continuing operations (4,191) (4,457) (5,196) (1,856) Discontinued operations - Loss on disposal (317) (16) - - Net earnings (loss) (4,508) (4,473) (5,196) (1,856) Basic earnings (loss) per share (0.29) (0.29) (0.33) (0.12) Diluted earnings (loss) per share (0.29) (0.29) (0.33) (0.12)
SCHEDULE II
Valuation and Qualifying Accounts(In thousands)
Additions Charged to: Balance at --------------------------- Balance at Beginning Costs and End of Description of Period Expenses Other Deductions Period - ---------------------------------------- ------------- -------------- ------------- ------------ ---------- Accumulated amortization of collection routes and contracts: Year ended December 30, 2000 $15,819 $5,498 $ - $2,489 $18,828 ====== ===== ==== ===== ====== Year ended January 1, 2000 $12,101 $5,686 $ 4 $1,972 $15,819 ====== ===== ==== ===== ====== Year ended January 2, 1999 $ 7,668 $5,759 $ - $1,326 $12,101 ====== ===== ==== ===== ====== Accumulated amortization of goodwill: Year ended December 30, 2000 $ 741 $ 142 $ - $ - $ 883 ====== ===== ==== ===== ====== Year ended January 1, 2000 $ 513 $ 228 $ - $ - $ 741 ====== ===== ==== ===== ====== Year ended January 2, 1999 $ 286 $ 227 $ - $ - $ 513 ====== ===== ==== ===== ====== Note: Deductions consist of the write-off of fully amortized collection routes and contracts.
Not applicable.
PART III
The information required by this item with respect to items 401 and 405 of Regulation S-K appears in the sections entitled "Election of Directors," "Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" included in the Registrant's definitive Proxy Statement to be filed on or before April 30, 2001, relating to the 2001 Annual Meeting of Stockholders, which information is incorporated herein by reference.
The information required by this item appears in the section entitled "Executive Compensation" included in the Registrant's definitive Proxy Statement to be filed on or before April 30, 2001, relating to the 2001 Annual Meeting of Stockholders, which information is incorporated herein by reference.
The information required by this item appears in the section entitled "Security Ownership of Certain Beneficial Owners and Management" included in the Registrant's definitive Proxy Statement to be filed on or before April 30, 2001, relating to the 2001 Annual Meeting of Stockholders, which information is incorporated herein by reference.
Mr. Taura has served as Chairman of the Board and Chief Executive Officer of the Company since August 1999. Mr. Taura is a partner in the management consulting firm Taura Flynn and Associates, LLC. Prior to Mr. Taura becoming an employee of the Company, he served as Chairman of the Board and Chief Executive Officer of the Company pursuant to an agreement between Taura, Flynn and Associates and the Company. Pursuant to such agreement, the Company paid Taura, Flynn and Associates $130,000 during Fiscal 2000.
Fredric J. Klink, a director of the Company, is a partner in the law firm of Dechert. The Company pays Dechert fees for the performance of various legal services.
(a) Documents filed as part of this report: (1) The following consolidated financial statements are included in Item 8. Page ----- Independent Auditors' Report 20 Consolidated Balance Sheets- December 30, 2000 and January 1, 2000 21 Consolidated Statements of Operations- Three years ended December 30, 2000 22 Consolidated Statements of Stockholders' Equity - Three years ended December 30, 2000 23 Consolidated Statements of Cash Flows - Three years ended December 30, 2000 24 Notes to Consolidated Financial Statements - December 30, 2000 and January 1, 2000 25 Quarterly Data 41 (2) The following financial statement schedule is included in Item 8. Schedule II - Valuation and Qualifying Accounts 42 Three years ended December 30, 2000 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. (3) (a) Exhibits Exhibit No. Description ----------- ------------ 3.1 * Restated Certificate of Incorporation of the Company. 3.2 * Amended and Restated Bylaws of the Company. 4.1 * Specimen Common Stock Certificate. 10.1 ** Amended and Restated Credit Agreement, dated as of January 22, 1999, among Darling International Inc., BankBoston, N.A., Comerica Bank, Credit Lyonnais New York Branch, and Wells Fargo Bank (Texas), National Association as Co-agents, and other banks as named therein. 10.2* Registration Rights Agreement, as amended. 10.3* Form of Indemnification Agreement. 10.4* Lease, dated November 30, 1993, between the Company and the Port of Tacoma. 10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco. 10.6 * 1993 Flexible Stock Option Plan. 10.7 *** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Wells Fargo Bank, N.A. and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between BankBoston, N.A. and Darling International Inc. dated as of June 26, 1997, related to interest rate swap transaction. 10.8 * Form of Executive Severance Agreement. 10.9 * 1994 Employee Flexible Stock Option Plan. 10.10* Non-Employee Directors Stock Option Plan. 10.17 Termination on September 20, 1999, of International Swap Dealers Association, Inc. ("ISDA") Master Agreement and Schedule between BankBoston, N.A. and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction and a new interest rate swap transaction is effected September 27, 1999. 10.17(a) Confirmation dated September 20, 1999 which supplements, forms part of, and is subject to, the ISDA Master Agreement dated as of June 6, 1997 between Credit Lyonnais and Darling International Inc. 10.18 Master Lease Agreement between Navistar Leasing Company and Darling International Inc. dated as of August 4, 1999. 13 21 Subsidiaries of the Registrant. 23 Consent of KPMG LLP. 27 Financial Data Schedule * Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994 (Registration No. 33-79478). ** Incorporated by reference to Form 8-K filed January 29, 1999. *** Incorporated by reference to Form 10-Q filed August 7, 1997. P Filed pursuant to temporary hardship exemption under cover of Form SE. (b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter ended December 30, 2000.
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Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Form 10-K for the Fiscal Year Ended December 30, 2000 on its behalf by the undersigned, thereunto duly authorized, in the city of Irving, State of Texas, on the 30th day of March, 2001.
DARLING INTERNATIONAL INC. By: /s/ Denis J. Taura ------------------------------------- Denis J. Taura Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date ----------- ------------------------ --------------- /s/ Denis J. Taura Chairman of the Board and March __, 2001 --------------------------- Chief Executive Officer Denis J. Taura /s/ James A. Ransweiler President and March __, 2001 --------------------------- Chief Operating Officer James A. Ransweiler (Principal Executive Officer) /s/ John O. Muse ExecutiveVice President - March __, 2001 --------------------------- Finance and Administration John O. Muse (Principal Financial and Accounting Officer) /s/ Bruce Waterfall Director March __, 2001 --------------------------- Bruce Waterfall /s/ Fredric J. Klink Director March __, 2001 --------------------------- Fredric J. Klink /s/ Dennis B. Longmire Director March __, 2001 --------------------------- Dennis B. Longmire /s/ Joe Colonnetta Director March __, 2001 --------------------------- Joe Colonnetta
Exhibit No. Description Page ------------ ----------------- 3.1 * Restated Certificate of Incorporation of the Company. 3.2 * Amended and Restated Bylaws of the Company. 4.1 * Specimen Common Stock Certificate. 10.1 ** Amended and Restated Credit Agreement, dated as of January 22, 1999, among Darling International Inc., BankBoston, N.A., Comerica Bank, Credit Lyonnais New York Branch, and Wells Fargo Bank (Texas), National Association as Co-agents, and other banks as named therein. 10.2* Registration Rights Agreement, as amended. 10.3* Form of Indemnification Agreement. 10.4* Lease, dated November 30, 1993, between the Company and the Port of Tacoma. 10.5 P Leases, dated July 1, 1996, between the Company and the City and County of San Francisco. 10.6 * 1993 Flexible Stock Option Plan. 10.7 *** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(a)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.7(b)*** International Swap Dealers Association, Inc. (ISDA) Master Agreement and Schedule between Credit Lyonnais and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction. 10.8 * Form of Executive Severance Agreement. 10.9 * 1994 Employee Flexible Stock Option Plan. 10.10* Non-Employee Directors Stock Option Plan. 10.17 Termination on September 20, 1999, of International Swap Dealers Association, Inc. ("ISDA") Master Agreement and Schedule between BankBoston, N.A. and Darling International Inc. dated as of June 6, 1997, related to interest rate swap transaction and a new interest rate swap transaction is effected September 27, 1999. 10.17(a) Confirmation dated September 20, 1999 which supplements, forms part of, and is subject to, the ISDA Master Agreement dated as of June 6, 1997 between Credit Lyonnais and Darling International Inc. 10.18 Master Lease Agreement between Navistar Leasing Company and Darling International Inc. dated as of August 4, 1999. 23 Consent of KPMG LLP. 49 27 Financial Data Schedule * Incorporated by reference from the Registrant's Registration Statement on Form S-1 filed July 15, 1994 (Registration No. 33-79478). ** Incorporated by reference to Form 8-K filed January 29, 1999. *** Incorporated by reference to Form 10-Q filed August 7, 1997. P Filed pursuant to temporary hardship exemption under cover of Form SE.